Is Akoustis Technologies (NASDAQ:AKTS) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Akoustis Technologies, Inc. (NASDAQ:AKTS) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Akoustis Technologies

How Much Debt Does Akoustis Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Akoustis Technologies had US$20.2m of debt, an increase on US$19.1m, over one year. But it also has US$39.6m in cash to offset that, meaning it has US$19.4m net cash.

How Healthy Is Akoustis Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Akoustis Technologies had liabilities of US$3.62m due within 12 months and liabilities of US$20.8m due beyond that. Offsetting these obligations, it had cash of US$39.6m as well as receivables valued at US$692.0k due within 12 months. So it actually has US$15.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Akoustis Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Akoustis Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Akoustis Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Akoustis Technologies reported revenue of US$2.1m, which is a gain of 92%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Akoustis Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Akoustis Technologies had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$28m and booked a US$32m accounting loss. But at least it has US$19.4m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Akoustis Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Akoustis Technologies .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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